What Really Goes Into the Fed's Favorite Measure of Inflation?

Tracy Alloway (0:03)

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Joe Weisenthal (0:22)

Thank you for watching.

Skanda Amarnath (0:25)

Thank you for watching.

Tracy Alloway (0:25)

Thank you for watching.

Joe Weisenthal (0:29)

Thank you for watching.

Thank you for watching. Thank you for watching.

Tracy Alloway (0:41)

Yeah, this is one of the things that I've really come to appreciate over time. There are so many different flavors of inflation, so many different ways of measuring it. My understanding is that there's basically, if you're gonna break it down, there's CPI, there's PCE, there's core and super core of each of those, and the way to do it is just choose whichever one of those confirms your priors and then focus on that.

Joe Weisenthal (1:05)

That's what I do.

Tracy Alloway (1:06)

That's the secret.

Joe Weisenthal (1:07)

That's what I do. Whether it's PCE, whether it's CPI, look for the one that's closest to 2%, and if neither are that close, then I lop out some things. It's like, oh, if you exclude rent and use cars and food and food going out.

Tracy Alloway (1:20)

Everything you need to survive.

Joe Weisenthal (1:21)

Then we're at 2%, so it's time to cut rates. That's basically my approach, but I'm glad you heard that validated by you.

Tracy Alloway (1:27)

I mean, that is the running joke, isn't it? If you exclude everything that you need to live, then inflation is coming down. But I think the important thing, the really important distinction is CPI versus PCE. CPI is probably the one that people have in their heads when they think about inflation, but PCE, of course, is the Fed's preferred measure and the thing that the central bank is actually focusing on.

Joe Weisenthal (1:51)

And I don't know why that is, actually. Like I know this, that most of the time, when people tell what's inflation rate right now, they'll look at CPI or maybe core CPI. But then we're always like, but you know, the Fed looks at PCE. And I guess, and I believe that to be true, but I actually don't know what it is about PCE that the Fed prefers. I know there's some different weights related to rent and there's some few things there that caused them to change trajectory from time to time.

Tracy Alloway (2:18)

I think it's smooth some stuff. Is that right? It's supposed to be less volatile. But one thing I do know, and I have to admit something here, and it's kind of embarrassing at this point in my career as a financial journalist, but CPI includes something called owner's equivalent rent, which is basically a measure of the cost of home ownership.

And it comes up all the time as like a key difference between CPI and PCE. And I, for the world, do not understand what, well, I kind of get what it's supposed to be, but I don't get how it's measured at all.

Joe Weisenthal (2:52)

Well, you know what I was thinking? Generally, I think it would be good to do more episodes about how do we actually get the data that we get? Like how do they do the jobs report survey? I actually don't really know much about that. How do they do all these different surveys?

All the smartest people we talk to tend to know this stuff really well.

Anyway, this episode that we're recording right now, when you're listening to it, it happens to be PCE Day, the day that the Fed's Preferred Inflation Measure comes out. And so we should understand what's in the Fed's Preferred Inflation Measure and how it differs from other measures of inflation.

Tracy Alloway (3:29)

I am really into this topic. I feel like this is gonna be an episode that I like bookmark the transcript of and then go back and look at it over and over again. So I'm looking forward to it.

Joe Weisenthal (3:38)

Well, I am excited to say, we do literally have the two perfect guests to talk about this. Two people who really have a deep understanding and appreciation for how these numbers that appear on the screen. PCE for me is just a number that appears at 8:30 a.m. on my Bloomberg terminal. But the reality is there are all these surveys and calculations and then tabulations. And so there's a lot of hard work that goes into producing this number. So we're gonna be talking to two people that have a deep understanding and appreciation for what goes in from a real bottoms up perspective, how these numbers appear on our screens. We're gonna be speaking to multiple time guests, both of them Omair Sharif. He is the founder and president of Inflation Insights, as well as Skanda Amarnath, executive director at Employ America. So Omair and Skanda, thank you both for coming back on the show.